Opinion
No. 14.
November 16, 1944.
Petition for Review of Decision of the Tax Court of the United States.
Petition by General Plastics, Inc., Durez Plastics Chemicals, Inc., successor, to review a decision of the Tax Court of the United States redetermining a deficiency in the taxes imposed by the Commissioner of Internal Revenue.
Decision affirmed.
The facts as found by the Tax Court are substantially as follows:
In 1937 the taxpayer began construction of a plant that would cost approximately $2,300,000 and, because of the need for funds for such project, it borrowed $500,000 from the Marine Trust Company of Buffalo on September 13, 1937. The taxpayer gave the bank ten notes of $50,000 each, maturing consecutively on March 15 and September 15 from 1938 to 1942, inclusive. These notes carried interest at the rate of 4 percent. The first two notes were paid off in 1938, leaving a balance of $400,000 owing at the close of that year.
Early in 1939, the taxpayer determined that additional funds were required and decided to sell a public issue of bonds to underwriters in order to obtain the money necessary for completion of the plant and for other purposes. However, since it was not ready at that time to complete an underwriting agreement, it made arrangements with the bank on February 15, 1939, for a further loan, with the thought in mind that the bonds would be issued subsequently. Under the terms of the February 15, 1939, agreement, the bank was to extend to the taxpayer a loan of $500,000 on March 15, 1939, and accept as evidence thereof nine notes, one in the amount of $100,000 maturing on March 15, 1940, and the remainder in the amount of $50,000 each maturing consecutively on September 15 and March 15 from 1940 to 1944, inclusive. These notes likewise carried interest at the rate of 4%.
On March 15, 1939, taxpayer delivered to the bank its check in the sum of $400,000, the amount of indebtedness remaining on the 1937 loan. The checking account of taxpayer in the same bank, upon which this check was drawn, had a credit balance of $300,000 at the opening of business on that day. Nevertheless, the bank marked the old notes in the amount of $400,000 "paid" and returned them to the taxpayer. On the same day the bank credited taxpayer with the amount of $500,000 in accordance with the loan agreement of February 15, 1939, and the taxpayer executed the nine notes mentioned above and delivered them to the bank. The bank records for March 15, 1939, show the posting of the $400,000 check as a debit and the $500,000 loan as a credit, leaving a credit balance at the close of the day of $400,000. Both the bank and the taxpayer made entries on their books recording the transaction as a payment of the old notes in the amount of $400,000 and the incurring of a new loan in the amount of $500,000.
The Commissioner disallowed a dividends paid credit for retirement of an indebtedness paid under § 27(a)(4) of the Internal Revenue Code, 26 U.S.C.A. Int. Rev.Code, § 27(a)(4). The Tax Court sustained the Commissioner. It found that the taxpayer's intent was that the old loan would be replaced by the new and that the indebtedness represented by the new notes was not new in an economic sense but was merely a replacement and continuation of the old. It said in part: "We think it immaterial that the second loan agreement did not refer to the first or require that the proceeds be used in part to retire the outstanding notes. The important factor is that the taxpayer, having borrowed or being about to borrow $500,000, was thereby in a position to retire the earlier obligation which it otherwise would not have done. Consequently, the new borrowing was the cause of the payment of the old, which appears to us to be the significant factor in demonstrating that the new indebtedness is not new in any economic sense, but a replacement and continuation of the old. Petitioner may not make into two separate and unrelated debts what is in reality one."
Harry Abt, of Buffalo, N.Y., for petitioner.
Samuel O. Clark, Jr., Asst. Atty. Gen., Sewall Key, A.F. Prescott, and Spurgeon Avakian, Sp. Assts. to the Atty. Gen., for respondent.
Before SWAN, AUGUSTUS N. HAND, and FRANK, Circuit Judges.
We think the Tax Court was right. In Phillips v. Commissioner, 3 Cir., 134 F.2d 73, the taxpayer lost, although the identity of the creditor was changed and here it was not, so that the taxpayer's case here is weaker. We approved the ruling of the Phillips case in Commissioner v. Grant Trading Co., 2 Cir., 135 F.2d 358.
Affirmed.